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Charlie Rose

News/Business. (2009) Authors Malcolm Gladwell and John Grisham. New. (CC) (Stereo)

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United States 29, China 26, U.s. 20, Us 12, America 6, Peter Orszag 4, Washington 3, Paul Krugman 3, Argentina 3, Niall Ferguson 3, Britain 2, New York 2, Warren Buffett 2, Charlie 2, The United States 2, United 2, Roger Altman 2, The Treasury 2, Ken Rogoff 1, Winston Churchill 1,
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  PBS    Charlie Rose    News/Business.  (2009) Authors Malcolm  
   Gladwell and John Grisham. New. (CC) (Stereo)  

    November 4, 2009
    12:35 - 1:30pm EST  

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>> rose: welcome to the broadcast. tonight, a look at our economy, first with the director of office of management and budget, peter orszag. >> concern about the deficit is widespread but all of the specific steps that you could take to address the deficit run into either constituency politics or other problems. it's so very popular to complain about the deficit but many of the specific steps that you could take to address it are
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unpopular. that is the fundamental challenge that we are facing and this we need help both from the american public and congress in addressing. >> rose: then popular ar thor and historian neal fergus. >> the u.s. continue to run the deficit over a ten year horizon. and if you look further than ten years-- because it's very important to do that-- and take into account the unfunded liabilitys of the medicare and social security systems, the position of the united states verges on bankruptcy. because although we have a $10 trillion debt, the unfunded liabilities are $100 trillion. that's something that seems to me one can't likely dismiss. >> rose: a program note. we intended to show you this evening interviews with our friends malcolm glad well and job john grisham but because of the economic story, we will show you those interviews at a later time. tonight, orszag and ferguson when we continue.
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captioning sponsored by rose communications from our studios in new york city, this is charlie rose. >> rose: peter orszag is here, he is the director of the office of management and budget. called more than just the budget director by the "new yorker" magazine, he's deeply involved in president obama's ambitious domestic agenda as well. that includes health care, energy policy and entitlement reform. he's focus tong country's long-term fiscal health. the administration recently
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released projections showing deficits growing by $9 trillion over the next ten years. speaking at new york university earlier today, peter orszag said the government is permitted to putting the country back on firm fiscal footing. i'm pleased to have him back at this table to tell us how they're going to do that. welcome. >> thanks for having me. >> rose: everywhere we go, whoever we talk to, says in the end on main street, on wall street, among foreign leaders who stop at this table they worry about the deficit. does america have too much debt that it cannot bring the political will to do something about it. >> rose: well, let's realize we actually have two deficits. one is the fiscal deficit this which we need to bring down, but we also have this g.d.p. deaf which we are trying to work our way out of. >> rose: explain the g.d.p. deficit meaning. >> there's a gap between how much the economy could produce and how much it's currently producing which at the beginning
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of this year was estimated to amount to more than a trillion dollars. to start to fill that hole, we had to take steps like the recovery act to try to get the economy back on its feet. so the problem would be challenging if it were just a fiscal one. but we have the dual deficits and need to address both. and that makes it even more challenging. >> rose: because the current accounts deficit as well. >> which is a reflection... now one of the striking things is we really are living in an exceptional time. normally higher budget deficits-- and, again, last year we had a $1.4 trillion deficit.... >> rose: this is the fiscal year that ended in september 31 of 2009? >> correct. it would show up as some combination of higher interest rates and increased borrowing from abroad. some combination thereof. instead we've seen very low interest rates and a decline in the current account deficit from 6% of the economy in 2006 to under 3% now. >> rose: because of the economic crisis we're going through. >> because of the economic crisis that we're going through. in a sense, for right now, at least, the treasury is the last
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borrower last standing. and if you look at total borrowing, public and private combined, it's down dramatically over the pass three years. the reason, however, and that reflects the exceptional economic downturn that we've been experiencing, the reason we need to address our deficits on a going forward basis is as private borrowing starts to pick up again, as consumption and business investment start to pick up again, that will no longer be the case and at that point financing the deficit will be crowding out private invest or causing more borrowing from abroad, and that's a problem we need to.... >> rose: that's a disaster. >> that is... we need to... as i said this morning, this is the serious problem and the outyear deficits are unsustainable. they have to come down. i also, though, think recognizing that problem and the need for action, it is worth pausing and remembering how we got here. you mentioned that $9 trillion projected deficit over the next decade. that basically reflects three
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things: the first is the failure to pay for two policies in particular, the 2001 and 2003 tax cuts and the medicare prescription drug benefit. those were deficit financed. over the next decade they account for $5 trillion. second, the economic downturn because it triggers the so-called automatic stabilizer which is raise unemployment benefits, raise food stamps, they cause... revenue tends to decline during an economic downturn. all of which is beneficial because it helps to mitigate the g.d.p. deficit that i was talking about. it also adds $3.5 trillion to the deficit. finally, the recovery act accounts for less than 10% of that total. so basically, the $9 trillion projected deficit can be entirely accounted for by the failure to pay for policies in the past, the economic downturn, and the steps we've had to take to combat that downturn. which is not to say action isn't necessary, it absolutely is. but it's important to realize we
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didn't get here by accident. >> rose: is this administration in favor of extending unemployment benefits? >> there are a whole series of questions that we are facing as we come to the end of the year, including unemployment benefits. i expect there will be some extension of unemployment benefits. >> rose: because people like arianna huffington are going around saying to me and others that the problem is with the administration is larry summers is against extending unemployment benefits. >> i don't want to speak about the views of individual members of the economic or other parts of the administration, but i don't think that's the view coming from the administration or, frankly, from any members of the economic.... >> rose: anybody. because the decision had been made or because that would not be the decision? >> i don't think... i have not heard any commentary suggesting that any one is opposed to extending unemployment benefits. >> rose: so larry summers or anyone else... >> again, i don't want to get into specific internal discussions, but i don't think that. >> rose: when you look at $1.4 trillion deficit for the most
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recent year, last year, 2009, you are by the end of the first term of this administration-- not knowing whether there will be a second term or not-- saying you're going to half that deficit. >> yes. that's a commitment the president made and we are in the midst of a policy process. we have a budget coming out in february. that budget will include proposals to put us back on a fiscally sustainable course and also reflect cutting the deficit in half by the end of the president's first term. >> rose: and what are those proposals? >> without speaking to the internal process.... >> rose: fair enough. >> ...there are both process suggestions. for example, there's lots of discussion in the congress about whether a fiscal commission would help. and we can talk more about.... >> rose: a deficit commission, essentially. >> a deficit commission. senator conrad, for example, has been a leader in putting that idea forward. others are coming forward with specific ideas about how to save money. i'll give you a simple example. we went out and asked federal
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employees "what would you do to make your agencies work more efficiently." through the what we call the save award. we got tens of thousands of responses and we're reading those. members of congress are also writing letters and feeding into this process. so there's lots of ideas floating around. so in february we'll come forward with our judgment about the best way forward. >> rose: tell me how you feel about a value-added tax as an additional source of revenue. >> that is an idea that has been talked about in academic circles. i haven't heard any direct policy discussion of that kind of proposal. >> rose: does it have merit? >> there are academic arguments in favor of it; there are arguments against it. >> rose: well, people like roger altman come to this program, former deputy secretary of the treasury... >> ...and talk about it. again, look, the arguments that have been put forward for a value-added tax, other countries do it, it can be in those other
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countries a sufficient way of raising revenue. on the other hand, there's concerns about its regressivety and about how it would interact with the rest of the tax code here in the united states. and we don't have a value-added tax. so, again, i don't... again, it's been discussed in academic circles. i have not heard serious policy discussion of it even coming from capitol hill. so it seems like more of an academic idea at this point than an idea that's directly in the mix in terms of policy. >> rose: what's going to be the biggest contributor to deficit reduction? >> well, over the long term i think we need to be very clear that it is not possible to tax your way out of the fiscal trajectory that we're on. and further more, it's not possible to reduce spending outside of health care sufficiently to address our.... >> rose: that means defense and... >> right. our long-term fiscal problem is disproportionately influenced by the rate at which health care costs grow. >> rose: right. >> over the next five or ten years, the situation is a little bit different and the mix may
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vary. but over the next 20, 30, 40, 70 100 years, the key thing is helping to reduce the rate of growth in health care costs. without that, nothing else we do will matter. >> rose: and so the bill is that's going to come out of the congress is going to be deficit neutral. you've guaranteed that. >> the bill... and, in fact, you've already seen in terms of the scoring from the congressional budget office, both the senate... the bill that came out of the senate finance committee and the bill being considered by the house of representatives is not only deficit neutral over the first decade, but both of them reduce the deficit in the second decade. and i think it's important to emphasize that's without counting any of the steps that will help transform the health care system and move it towards one that's oriented towards quality rather than quantity. so it's basically to a first approximation, at least, not really counting the effects of moving towards bundling payments accountable care organizations, the affect on quality from a
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variety of changes that are included in the legislation. >> rose: do i hear you saying the most important thing we can do is to get our... get health care costs in control? under control? >> in terms of the long-term fiscal as opposed to the medium-term, absolutely. more will be necessary. we face a deficit in social security and there are other problems. >> rose: medicare and... >> medicare and medicaid are the key drivers of our long-term fiscal problem. in order to help contain their cost growth over the long term, we need a new health care system that has digitized information, so health information technology in which that information is used to assess what's working and what's not more intelligently and in which we're paying for quality rather than quantity, while also encouraging prevention and wellness. >> rose: on this program with you is neil ferguson, who you know well... or roh of, know his ideas who basically is arguing that we have a huge problem
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facing us because we can't deal with our deficit and at some point the chinese fefkally are not going to take our debt anymore, they'll find other places to invest their money. and when that happens, there's no political to deal with the deficit. >> let's first be clear about the immediate situation and why we're eager to address our medium term deficit. first, with troord the medium situation, long-term rates remain quite low, under 4%. if that's continued throughout the rest of this year, it thereby lowest nominal interest rate since the 1950s. the current account deficit which is a reflection of how much we're borrowing from abroad has fallen in half as a share of the economy over the past three years. >> rose: how much of that is because of the global economic reception. >> my point is for right now u.s. treasury securities remain the safest investment in the world and we are addressing the
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immediate economic crisis as we should be. and i think in my discussions with chinese and other creditors there's recognition of that. there's also recognition that we need to address the key driver of our long-term deficits, health care. one of the reasons, however, that we want to get ahead and as soon as we're done with health care turn to reducing our medium-term deficits is to make sure we don't wind up in the situation in which investor confidence starts to turn and there are concerns about the trajectory we're on. we need and are committed to getting ahead of that so that we don't face a fiscal crisis. nooil. >> is it the belief of the administration that the idea of deficit has traction as a huge problem in main street in and it's not just an idea that is talked about by people who have a great knowledge of finance. >> i think so, the problem is not lack of concern about the deficit, there's plenty of
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concern about the deficit. the problem is concern about the deficit is widespread, but all of the specific steps that you could take to address the deficit run into either constituency politics or other problems. it's so very popular to complain about the deficit, but many of the specific steps that you could take to address it are unpopular. and that is the fundamental challenge that we are face and that we need help both from the american public and the congress in addressing. >> rose: what are your numbers for next year? for 2010 in terms of economic growth? >> well, we are actually going to be updating our economic assumptions as part of the budget that we put out in february and i'd like to reserve an updated set of projections for that point. >> rose: is it above 3%? >> it is worth noting that currently in the last quarter, as you know.... >> rose: 3.5%. >> ...the economy grew at 3.5%. one of the things looking forward in 2010 that we are monitoring is state and local
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governments face significant deficits and that will be a drag on the economy. the inventory cycle, which will help to push economic growth... propel economic growth later this year and into early next year may start to reverse. >> rose: there's also this question, and it's raised about the chinese projections and raised about other projections. whose assumptions do you use? what numbers are vooibl to base your decisions? >> well, we... the most recent set of projections that we used for mid-session review were very much in line with the blue chip private sector forecast. >> rose: okay, this is goldman sachs and j.p. morgan and a whole variety of people that do that. >> and without pre-judging exactly where we wind up for the february budget, i would expect them again be in line with private sector forecast. and i think that is... that helps to provide credibility to the effort that we're undertaking. our numbers are in line with other outsiders, so that there's
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no concern they're being tilted one way or another. >> rose: what's happened to young people in this recession? >> well, one of the things that i touched upon my speech in this morn sthag recessions hit young people particularly hard. not only if their parents are laid off in which there's an effect on high school dropout rates, but even for those who are not directly affected. their parents or family members are not unemployed. graduateing into a recession has an adverse impact on your wages and this affect persists and in particular the evidence suggests for each percentage point increase in the unemployment rate, initial wages are depressed by 6% upon graduation and even 15 years after graduation are still 3% lower than otherwise similar graduates in other years. and that's for each percentage point increase in unemployment. for those who are college seniors today, when they entered college, the unemployment rate was about 5%... percentage points lower than it is today. so you can multiply those figures to get the ultimate
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impact. >> rose: how do you factor in two things: one is interest rates and where they might be in a decision by the federal reserve. and also how do you factor in what will be the dollar which will have an influence on exports and imports? >> in these economic projections? >> rose: in your projections. >> again, a variety of economic variables, not just the ones that you mentioned but also inflation and a whole series of other assumptions go into the macroeconomic projections that form a key part of our budget projections. >> rose: when you look ahead, what boar reis you the most. >> well, balancing the key competing deficits. the very real deficit we face in terms of economic activity because in terms of prospects for young graduates, they're being directly affected by how aggressively we attack that problem. unfortunately, there's some
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tension between those two issues. how quickly one should move towards fiscal deficit reduction and away from trying to address our short-term economic crisis is one of the key things that.... >> rose: show mow me how that tension takes place. >> in particular in the short run in an economic crisis like we have faced, is a higher deficit helps to bolster macroeconomic demand, thereby, for example, helping aten wait the effect on new graduates. in other words, in an economic crisis like we face high,er benefits promote macroeconomic activity. over the medium term, however, the situation flips. imagine a bids, for example, that had a business plan of rapid growth for a year or two to address some crisis and then dramatic decline. that would be a very difficult business plan to execute off. that's precisely what we need to do as a nation.
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>> rose: do we need a stimulus? >> again, growth was 3.5% in the third quarter, the labor market remains unacceptably weak, we are constantly reassessing our options with regard to boosting job growth but for right now, at least, we are in the mode of carefully monitoring and assessing options. >> rose: here's what paul krugman said on monday. "what i keep hearing from washington is one of two arguments, either the stimulus has failed so we shouldn't do anymore two the stimulus has succeeded, g.d.p. is growing so we don't need to do anymore. the truth is the stimulus was too little of a good thing, it helped but wasn't big enough, seems to be too complicated for an era of soundbite politics? can we afford do more? we can't afford not to." paul krugman. >> well, again, i think what we did was a very aggressive step, much more aggressive than many people wanted. it's yielding benefits. we're seeing it play out and
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assessing the situation. >> rose: what don't you know that you wish you knew. >> oh, boy, how long do you have. (laughs) >> rose: it will help us understand your dilemma if you'll tell us that. >> i think there were two or three things that if i had a crystal ball would be.... >> rose: enormously helpful to you in your job. >> but we need to realize that crystal ball doesn't exist, at least with perfect clarity. one is the path of economic recovery and whether we will or won't face an issue in 2010. one of the things we want to the avoid, and i think it's crucial to avoid is we don't want to repeat the mistake of 1937 when fiscal support for economic for the economy, that first category we're talking about, was withdrawn too quickly and we threw the economy back into an economic downturn. that would not be good for anyone and we need to avoid that outcome. so coming back to the discussion we had earlier, if we knew for
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sure how much the escape velocity was in terms of economic activity and whether that would outweigh the drag from state and local deficits, the inventory cycle and other forces, that would be enormously helpful in designing the opt malpathtor best path forward to move from a period in which we need higher deficits temporarily in order to help support the economy, in needing lower deficits to avoid harming the economy. >> rose: another thing argued by niall first degree swhon is on this program that i taped earlier, it is that... he says that... he asks this question. do the people in washington understand that inevitably china is going to have a larger economy than the united states and a more dominant economy than the united states. >> well, there are a series of academic analyses that suggest when that potential crossover point could be. >> rose: somewhere between 2025
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and 2050. >> one of the things that of course becomes difficult is projections that far out or subject to significant uncertainty. i think rather than trying to point point that date, the more point thing for us to do is to be investing in as much as we can in making our economy as productive as possible. that means not only addressing the problems we have already discussed but importantly things like things like continuing to improve our educational system. >> rose: climate change, infrastructure. >> so there's actually another set of deficits that we haven't touched upon in terms of investing in key priorities like education, like infrastructure, like protecting the planet. >> rose: that was part of what the stimulus program is supposed to be about, wasn't it? >> the recovery act involved starting to address some of those issues. it's not a panacea. >> rose: if you look at the economic growth rate, how much of it was because of the stimulus program? >> well, estimates suggest that the recovery acted aed three to
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four percentage points of economic activity in the third quarter and overall economic growth was 3.5%. so one can say that all of it can be attributable to the recovery act directly or indirectly. you need to remember that 3% to 4% estimate to the recovery act involves affects indirectly on consumption for households and it's not... people think recovery act, government spending and instead a lot of the fact is tax relief which then spurs household consumption or added economic activity which helps businesses invest. and so a lot of the effects are indirect. >> there has been a release of people from the business community who visited the white house-- and by that i mean not necessarily the president but include the president-- but it's executives like jeff immelt and others, it's all public out there on the record now. what are they telling you, these business people? you just came from meetings in new york with business people.
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are they telling you you're not doing enough, we want you do? get your hands off the economy? what are they saying? >> it varies, as you would expect. >> rose: or get your hands off the private sector? >> it varies. they are, like us, monitoring the labor market and whether job growth is picking up. >> rose: but do they see the world like you see it for the most part? >> well, for the most part in terms of understanding the dynamics they will often reach somewhat different judgments but that's natural and their judgments are not all consistent with one another. >> rose: i understand that. but what's the great divide? is there a basic divide between what you're hearing from the business community and what you're doing? >> i don't know that i would point to a big divide. i think, again, there's been a significant amount and, frankly, one of the things that's beneficial in terms of outreach not only to liz beaders but also to progressives and unions is to make sure we're hearing their concerns and can deal with them. >> rose: that you're listening.
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>> that we're listening. >> rose: what's the great debate within the administration about where to go. we clearly know, sort of, what the... we know what the discussion is about afghanistan. it's clear. we've heard. there's been enough reports about this reconsideration of a strategy. what's the... >> well, i hope it's enough of a family that we're not going to air enough of the laundry.... >> rose: it's not laundry. it's helping us understand the debate that's going on. >> i would like to protect the internal discussions. >> rose: i'm not asking you to tell me who's doing what. i want you to tell us, my audience, exact play's the push-pull that you guys are trying to figure out. >> some of the tension wes face, the dressing, the short-term macrohole at the same time we face a long-term fiscal problem. constantly assessing the state of the labor market and whether additional effort is or is not warranted. a set of decisions that, again r not surprising about whether various provisions that are expiring at the end of this year
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should or should not be extended. >> rose: like tax cuts? oh, unemployment benefits, right. is up >> those expire at the end of next year. and then, of course, there's just a whole series of other policy issues are constantly in the mix from implementation of the recovery act, we have important investments in health information technology and broadband in which there are policy discussions going on. so a very active internal discussion. >> rose: i hope you'll come back and tell us about it. >> i will come back, i don't know how much i'll tell you about it. thank you. >> rose: thank you very much. a pleasure to have you on the broadcast. >> i appreciate being here. >> rose: peter orszag, the director of office of management and budget. he's the man that between now and february will put together your budget. then once he puts together your budget congress will consider it. backs in a moment with niall ferguson. stay with us.
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niall ferguson is here, he is an economic historian, a professor at harvard, he is an author you may also be familiar with his documentaries broadcast on pbs, his writings about the economic crisis and a potential rupture in u.s./china relations have received much attention and controversy. his most recent book is now in paper back, it is called "the ascent of money, a financial history of the world." i am pleased to have him back at this stable, welcome. although it was a different table that we still use. this is a little smaller table. >> did you break it? did you throw it at someone? >> rose: (laughs) turned it over on them. okay, economic recovery. in the united states, quarter, 3 .5% growth, is there a global economic recovery under way? >> i think there's a global economic recovery which looks actually rather more sustainable
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than the u.s. recovery. most of the u.s. recovery is in the form of stimulus from government, the cash for clunkers program and the encouragement to first time home buyers. that accounted for a really large percentage. >> rose: more than 50? >> pretty close to half. you add those two things together then the rest of it has to do with inventories. i don't think this is a sustainable recovery yet. the recession is technically over but i will be very surprised if the next quarter's numbers are as good because these programs are expiring or have expired. the global recovery is more interesting because china and not only china also india and brazil, plus a whole bunch of other mainly asian economies are growing much faster than i think anybody would have predicted six months ago. not many people back in in the dark days of the spring thought that even china would bounce back this strongly. but with growth now at an annual rate of around 10% and interestingly consumer growth in china growing even faster than
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that, there's clearly a global recovery. but the engine of growth is not the united states. for the first time-- and one might say in a century-- the engine of growth in the world economy is no longer the united states, it's china. >> rose: but it hadn't been the united states for a number of years. >> the engine of growth in the world economy was china plus the united states in the last ten years. it was very much china plus the united states. you can figure this out. if you look at the decade running up to the crisis, 1998 to 2007 two fifths of total growth in the world economy was china plus america. but of that two fifths, the united states was the lion's share just because it's still the biggest any the world. >> rose: and how much of it these do with the chinese stimulus? >> a lot because that in relative terms is a very, very big shot in the arm of china's economy. plus, china's stimulus kind of works better. it turns out that.... >> rose: that's the way it is with a command economy. >> you have have kings in policies where you aim to stimulate demand through massive government expenditure more
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easily in a controlled economy than in an open economy like that of the united states. which is a point the canes made in the 1930s if you look at the 1936 classic. in the german edition, cane says that the policies he recommends of deficit-financed government pump priming will work better in a controlled totalitarian economy than in a free open economy and that's still true today. >> rose: so what's this sort of... your own sense of the american economy over the next two or three years? >> well, i'm relatively pessimistic about haw howe fast growth is going to be. the administration earlier this year forecast that the economy would grow next year by 3.5%, then by 4%, then by 4.5% after that. i think that's highly unlikely to happen. my guess that the economy will grow in real terms at closer to 2% a year. for the next few years. and the reason i think that is that the u.s. consumer just can't bounce back in the way that we've been used to seeing in previous recessions.
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we've reached the limits of leverage on household balance sheets. when you've got debts equivalent to around 120% of personal disposable income, there's no way you can go back out to the shopping mall even if the credit card companies were cutting you some slack, which they're not. so i think if the u.s. consumer is essentially going to be behaving in a parsimonious, even thrifty way, there's no way the u.s. economy can grow at the rates we've seen in the past. >> rose: that the bind we're caught in? on the one hand we've been living in this consumption society where china and other places have been a saving economy and now wed we need to be a consumption economy to fuel our economy even though in the long term we need to be a saving economy? >> i think this is the problem and there's no way that you can have the old style debt-fueled consumption that was at the heart of our growth really over the last 20 years once you reach this level of indebtedness. so that game is over and we're in the process of a huge global
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rebalancing which requires americans to become more thrifty and requires asians to become rather more profligate. we need chinese to go out shopping. >> rose: but that's their concern, whether they have created a domestic demand that will replace the international demand for what they manufacture >> gradually they are moving in that direction but you can't do that sort of thing overnight. there is some evidence-- i was in hong kong recently talking about this to people who are expert about the chinese consumer-- there is evidence they are going out and shopping. there's a bit of a myth that the chinese households are big savers. that's not true, most of the savings that goes on in the chinese economies by corporations who make more money than they know what to do with. so chinese households are saving less and they are spending more. but you can't transform a culture as thrifty as china's in the space of a few months. this will take years to unfold. >> rose: the key to can t chinese economy is creating a demanding middle-class.
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>> right. you need the end to switch china's manufacturing to domestic demand and away from foreign demand. the chinese model has been export driven really for decades now, but particularly for the last ten years. they focused on getting a bigger and bigger market share, particularly of the u.s. consumer market but also the european consumer market and they did this by keeping their currency weak and by becoming.... >> rose: and enormous pressure on the part of the united states and others to get them to... >> this pressure achieved nothing. on the contrary, when the crisis struck, china canceled all the slight appreciation they'd allowed and reverted to a straight dollar peg. now, that's really, really important, charlie, because one they the u.s. can get itself going again is by letting the dollar weaken. because that will stimulate u.s. exports and that's something that unofficially, tacitly has become american policy. but the chinese will piggyback on that. >> rose: you will never see
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politician say that. >> they're null in favor of the strong dollar. >> rose: (laughs) exactly. >> and the more they say that, the more you know the dollar is going down. that's a long established american practice it goes back to the 1970s when john connolly, the treasury secretary, said to the europeans of the dollar "our currency, your problem." we're doing it again this time around. it's yet another devaluation designed to get the economy going. but the chinese are piggybacking on this because if we go down, the currency of china goes down, too. so interestingly, china is not only growing its own domestic demand it's also building up its export market share again. anybody who'sing on the wrong side of that process, like that europeans with their increasingly strong euro or the japanese with the strong yen is getting killed because the chinese are just killing their manufacturing exports. >> rose: let's talk about the prospect for america because you make these terrifying analogys to the british empire. you know, that our best days are behind us?
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that chai mare a, which was a grand bargain, is going to fall apart. that our dollar will not be the reserve currency. that we are looking at a deficit that is out of control. so we should just give up. >> one should never give up. that's an important thing to bear in mind. but one should always beware of british historians. >> rose: (laughs) exactly. >> my friend paul kennedy did this in the late 1980s and it was the soviet union.... >> rose: "the end of america" or whatever his phrase was. >> one has to look carefully that the problems the united states faces and draw analogys with great caution. >> rose: but you do it. >> well, i do it. let me put it this way. at the end of world war ii, the united kingdom was as indebted in relation to its grant as the united states is today. if you include private death, most of britain's debt was public death.
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today the united states has a bigger mountain of private debt. they have there's a $9 trillion of cumulous of debt. this there's no question that's unsustainable. even paul krugman who loves deficit would acknowledge that's an unsustainable path.... >> rose: what did cane say about deficits? >> cane's advice... if he were alive today he would say this is excessive and unsustainable because most of this it is not a canesian stimulus package. most of it is a structure deficit because the united states spends much more every year regardless of whether there's a boom or bust than it raises in taxation. so this can't be justified in canesian terms. it's a fundamental crisis of public finance which the political class in washington seems unable to address. >> rose: and that's the problem, they don't the political will to do that >> it is a question of political will because the underlying strength of the u.s. economy is almost certainly greater than that of the british economy in 1945. but public finance-- and this is
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one of the points i try toy make in "the ascent of money" can trump your economy even if you have a wonderful work force, tremendous natural resources and all the rest of it. think of argentina. my worry is not only that there's a british imperial parallel but also a latin american parallel here. that the united states is in danger of evolving.... >> rose: with argentina? >> well, in the sense that argentina was about the fourth-richest countfully the world a hundred years ago. and over that one-year period systematically blew it as a result of mismanagement of its public.... >> rose: so the currency was worth nothing. >> currency after currency. how many currencies did they have? how many defaults? >> t united states is on an unsustainable fiscal path and we know that path ends in one of two ways. you either default on the debt or you depreciate it away, you inflate it away doctor your currency.... >> rose: so we're running out of money because we... >> or you can end up with too much money. rather the opposite.... >> rose: we run out of money because it's worthless or you run out of money because, you know you've got all this debt
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and you can't service the debt. >> what you run out of is credit. remember, the united states relies on foreigners who hold half the federal debt to finance its borrowing habit. if foreigners lose confidence in the u.s. as a borrower, and if they lose confidence in the dollar as a currency, then things can turn ugly quite quickly. that seems to be.... >> rose: do you think... i talk to these people as much as you do, as you know. they don't seem to me that they are about to be frightened by the american economic future. i do not hear them saying oh, my god, it's over for america so we better not, a, by any more dollars 0, b, we better not... better find alternative investments. >> but these are the same people who in late 2006 and early 2007 were tells me and perhaps you two too that there would never be another recession in the united states because the great.... >> rose: what about the chinese who are buying the debt? they're saying "we buy the debt because when we look around, it's the best place, because we still have confidence in
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america." >> well, that's not really what they think. it may be what they say. two things. first of all, they're buying less than they used to when we need them to buy a lot more. in 2007 at peak they were buying three quarters of all the new debt issued by the u.s. treasury. now it's about 10%. we are issuing much, much more and they're buying much less because they kneel $2 trillion is about enough, really. if you look at their international reserves which are predominantly held in dollars, they have a huge.... >> rose: it was about a billion dollars a day for a while. >> it was an extraordinary amount of money flowing from china to the united states to finance our borrowing habit. >> rose: so we could buy their goods. >> so we could buy their goods. vendor financed if you like. and it worked well for a time. but i always argued that chimerica was unstable. it was a pun on the word chimera. it's proved to be from the advantage point of the united states... i think it served china much better than it served the united states they have been growing their economy at 10% a year, they're on track to
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overtake us by 2027. >> rose: overtake us not per capita but overtake us in terms of the size of the economy? >> in terms of the grpt. no in per capita terms, that will take many, many years. >> rose: a billion plus population. right. so you they will happen when? 2030? 2050. >> well, jim o'kneel of goldman sachs, his projection was on 2027-- i always joke on april 14 2:30 in the afternoon, china's g.d.p. exceeds that of the united states. but it's in that ballpark. there hasn't been a point in the last century when anybody looked like doing that. a few people thought japan might in the glory days of the 1980s. i think the chinese challenge is the more credible one. not because of the sheer size of china but also because they have a model that seems to deliver, even if it delivers at the expense of others, that's why i think that you are currency policy is a source of concern. >> rose: but you also argue about china that as their economy grows, their politics have to change and they're
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unlikely to change and therefore when the game looks bad for them they're going to turn nationalistic and then the problem becomes an aggressive china. >> this needs to be a concern as the chinese leadership changes. the next generation of chinese leaders i think will be more assertive and they have up their sleeve this wonderful trump card. if things go wrong-- and they may. let's face it, every asian economic miracle is punctuated by at least one financial crisis. if things go wrong, they can call on a formidable popular nationalism. that's a sentiment which we know as historian cans always be called upon when the going gets you have to economically. >> rose: your premise is based on two things. one, the chinese political system will not change, a. and, b, the united states won't have v the political will to deal with the deficit. >> i think both of those are reasonable assumptions. >> rose: on this very same program that you're on the director of the office of management and budget says that
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we will take the deficit of 2009 and by 2012, 2013, we will halve it. by the time the president finishes the first term, we cut the deficit in half. so that suggests some political will, if you believe him, to do it. >> well, it's a... it would still therefore be around 6% of gross domestic product. now, that is a very large deficit in any normal circumstances. to halve it from 12% of g.d.p. to 6% doesn't constitute fiscal stable sags. you still will be borough around a trillion dollars. >> rose: it constitutes progress for god's sake. >> it's progress. but my question is where this their plans to we get to budget balance. it's clear from the forecast that he himself has made that the u.s. continues to run a deficit over a ten-year horizon and if you look further beyond ten years-- because it's very important do that-- and take into account the unfunded liabilities of the medicare and social security systems, the position of the united states
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verges on bankruptcy, because although we have a $10 trillion debt, the unfunded liabilitys are $100 trillion. that's something that it seems to me one can't likely dismiss. >> rose: warren buffett as we speak today made a huge multibillion dollar $30 to $40 billion investment in railways saying "this is my confidence in the american economy." >> well, good luck to him. >> rose: well, he's... he knows something about economies and investments, doesn't he? >> oh, sure, and his track record has been very impressive until so very recently. and it's been less so. >> rose: it was less so last year but it's come back. >> so it's possible that he's right and i'm wrong. i don't rule that out. and that all is going to be well and the u.s. is going to bounce back. >> rose: are you bre paired to say "it's either buffett or me" in terms of analysis? >> i'm happy to bet with him although i probably can't put down quite as much money as he can in his bet. i'm a hunlable academic.
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it does seem to me a better man would put money on not just china but china's trading partners. i would rather by australian railroads than american railroads because i know that stuff is being shipped from australia to china in much larger quantities than is currently being shipped coast to coast in the united states. i mean, actually, freight traffic on u.s. railroads is at an extraordinary low level right now with very little sign of improvement. so he's a very optimistic man, i would say. >> rose: you think he's making a serious mistake. >> i do. because i don't see that the united states can grow at rates rapid enough to make that investment pay cheap. though the price may be. now it's reckless of know take on warren buffett. but you know what? >> rose: what? >> this is a moment in history when the things that have been true for his entire life may have ceased to be true. the biggest problem that anybody faces today is that their lifetime experience-- even if their life as long as warren buffetts-- is no longer a reliable guide to the future. why? we just missed a great depression by a hair's breadth
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and we missed it by throwing a vast quantity of money at the u.s. economy. by running a deficit as large as we ran in world war ii in peacetime. nobody knows where that will create unintended consequences that will slow the economy down. my instinct is that it will. >> rose: let me go to a tangent real quick. was this the wrong thing to do? to throw that money at a time that 24 this economy needed somebody to do something dramatic, are you suggesting that the things they did was wrong? >> no. there were two policies, one of this which was more important than the other. the monetary policy that ben bernanke pursued at the fed particularly after the lehman crisis laugh yeast, a massive expansion of the monetary base was the right policy. that's the policy milton freedman would have recommended. >> rose: who was a monitorist. >> and saw the cause of the great depression as being bank failures and monetary tightening by the fed. we learned that lesson. the other policy, the canesian policy, involves adding an enormous deficit on top of an
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already large structural deficit. and i don't think that that has been anything as important in getting the economy out of the depression scenario. and i think one has to make that distinction. the fiscal policy could turn out to be okay as long as we know how to stabilize it. but right now we don't. right now we are clearly out of fiscal control. and at some point, the world is going to wake up to that and say it's no longer sense to believe pile these bonds up in a reasonable expectation that the united states will either depreciate the debt away by letting the dollar fall through the floor or will actually start to call into question its own commitment to these payments. di fault is not a scenario we can rule out, let me put it that way. >> rose: default is not a scenario we can rule out. default on our debt and therefore what does that mean? >> what will happen first is that we'll default on the commitments made under the medicare and social security systems. that default, the domestic default on our, as it were, domestic creditors, is an almost certain outcome. the only question is which
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president takes it? which president grasps that and admits we cannot possibly fulfill those commitments? the other question of default seems to me less likely. we're not likely to default on our outstanding bonds held by foreigners. but foreigners may begin to question the sustainability of a fiscal policy that requires us to borrow a trillion dollars a year. what they'll do when we do that.... >> rose: everybody believes that. everybody... wait, stop. everybody believes that you cannot... >> think of what that means. >> rose: you cannot continue at the pace. everybody agrees with that. but they don't necessarily assume there are not policies and actions that can prevent the disaster of default that you are arguing are inevitable. >> of course they are. for example, the united states could introduce a value added tax. >> rose: right. >> or a federal sales tax. >> rose: right. >> can you imagine this congress do that? >> rose: i don't know. it depends on the options they look at at the time. you have people like roger altman coming on this program saying "they're going to have to have a value added tax."
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if they look at this thing and niall ferguson is saying "this is the disaster you face," perhaps they'll say, thank you, niall, we better do something and add a value added tax. maybe they'll believe you have to change the taxing policy. >> but remember winston churchill who said the united states does all the right thing when all the other things have been exhausted. the reason i mentioned default is not because i think united states is going to turn into mexico or argentina overnight. >> rose: well, you almost suggested that earlier. >> let me make this clear. ed for the to persuade investors to continue to buy u.s. government bonds we'll have to offer them a higher interest rate for their money. now, when that happens, the bonds go down in price, the yields go up, our fiscal crisis immediately gets worse because the cost of servicing in vast $10 trillion debt goes up. that's what worries me most. because what you could then get is a situation where real interest rates go up. and that's scriping for a heavily indebted economy, just as it's crippling for a heavily
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indebted household. that's why i worry about buffett's bet. that's why i think the u.s. could slow down in 2010, 2007, not speeding up. >> rose: who do you know from academe yashgs government, wall street, that believes exactly as you say? >> let me name just one. >> rose: name just one. >> ken rogoff. >>. >> rose: he's coming on this week. but he comes from the same place. >> he comes from the same university but not the same place. he's a very distinguished economist who used to be in the international monetary fund. he and i think very similar ways about this problem, to name but one. i think if you were to ask george soros is he optimistic.... >> rose: agreed. george soros... on those three i agree. so what about paul volcker, who's a distinguished american... former chairman of the federal reserve. >> i think if anything he is more pessimistic than the two people i just mentioned. of course, it's hard for him to express publicly his disquiet
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because of his official position. >> rose: so you think the obama administration is just wrong headed? >> no. listen. i don't want to criticize some very clever individuals who are grabling with a huge.... >> rose: larry summers, tim geithner... >> these are some of the smartest people in the world. i have huge regard for all of them. >> rose: so therefore... what's the difference between them and you? if the people who have the power... what's the difference between the people who have the power... >> charlie, they don't have the power! the congress has the power! that's what people don't understand about the situation we're in. right now the president proposes with his clever advisors helping him but congress disposes and it will be congress that decides whether the health care bill ultimately adds to the deficit or does not. >> rose: but are you suggesting that if they halve the deficit in four years, that that's not putting us on the track to a balanced budget? if they continue that kind of progress? >> it's not because theirer numbers... their ten-year budget don't put us on course for a balanced budget, they put us on course to carry on borrow ago
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trillion dollars a year as far as the eye can see. that it seems is a recipe for trouble. there comes a point-- and this is one of the lessons of financial history-- there comes a point when the international markets simply can't take anymore. and what's interesting about this is it's non-linear. it's not that people gradually lose faith in the credit worthiness of a country or gradually lose faith in a currency as an international reserve currency. it can happen quite s.u.d. suddenly. expectations change. that's what if british experience tells you. in 1945, churchill still thought of the british empire as a mighty force equal in power to the soviet union and the united states. but it was a heavily indebted empire. debt g.d.p. was about 250%. what's more, the british then embarked on health care reform. the national health service, thinking that they had limitless funds to devote to rewording themselves to the sacrifices. >> rose: i will remind you that the american health care system that is proposed is supposed to be deficit neutral.
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>> yes. we'll see. f it really is. i'd be impressed. >> rose: but here is the idea. nobody thinks that america is... the world order is changing. and you point that. there's a new economic order and there's a new political order. we know there's a level of shift of power to the east. and the president knows it, everybody in europe knows it. that's not an idea that people are suggesting is not true. >> but it's not that they... don't say it, but do we grasp what this means? for 500 years the world has moved in the direction of the west. and the united states was the last of the great western powers to benefit from this shift of resources from east to west. we're living through a change that ends 500 years of history, a great rebalancing of the world that will see asian powers become equal in their statue in economic terms and then geopolitical terms. >> rose: is it a zero-sum game. >> it can be. >> rose: but is it? or not? maybe the united states is better off with a smaller share
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of a larger pie. >> of course. but, you know, the share is always going to be getting smaller as these asian economies grow. and as we slow down. and i think the big question which i don't really see being addressd is how do you cope with the rise of a credible rival? the soviet union was never going to have an economy the same size as the united states. it never came close. and today russia's economy is 4% the size of the u.s. we are facing a genuine superpower, a real economic rival. and i don't think american foreign policy has yet adapted to that. i think's an assumption with chimerica. >> rose: what would it do to suggested the adapted to that? what would it do? >> let me put it this way. there is a very clear dilemma which isn't often enough discussed. do we accommodate china's recognize and do we accept, as britain accommodate it had rise of the united states, that one day it will be the dominate power of the world and we better live with that. or do we try